BEYOND THE BIG SIX: IDENTIFYING ALTERNATIVE US OFFICE
MARKETS BASED ON LONG TERM DEMAND GENERATORS
Stewart Rubin
Director
New York Life Real Estate Investors
INTRODUCTION
US office building sale prices are 3.5% above the November 2007 peak of the last cycle1 (107.6%
Percentage Peak-to-Trough Loss Recovered). Much of the value increase is associated with major market
Central Business District (CBD) office space in Boston, Chicago, Los Angeles, New York, San Francisco,
and Washington2. The Office-CBD Major Market Index is 27.5% above its previous peak (155.9%
Percentage Peak-to-Trough Loss Recovered).The six major markets have experienced significant foreign
and domestic investment. These markets mostly3 benefit from long term growth factors including high
education attainment levels, high share of residents with Science, Technology, Engineering, and Math
(STEM) degrees, significant high-tech location quotients4 (LQ), lack of exposure to the more volatile
energy sector, and high current office employment.
Boston, Chicago, Los Angeles, New York, San Francisco, and Washington are global cities with strong
economic engines. However, since these major markets are priced well beyond previous peak levels,
alternatives will be identified. The alternative investment markets either have or are acquiring some of
the underlying characteristics of the big six markets. Although they may never achieve the depth and
status of the big six markets, they have long term value growth potential. Many of these metros are
being transformed and will likely be larger and stronger office markets in 15 to 20 years time.
This paper will highlight select markets that excel in several long term growth factors that spawn and
sustain office demand. These demand factors include the aforementioned education and high-tech
emphasis, but also include characteristics that are attractive to corporations and young college graduates
such as affordable housing. The markets are selected from a long term investment perspective
independent of short term supply considerations. Focus is placed on secular change underlying cyclical
rhythms.
VALUE APPRECIATION
CBD office is now 21.8% higher than the last peak (144.4% Percentage Peak-to-Trough Loss Recovered)
while CBD office in major markets has soared 27.5% past the previous peak. As detailed in Table 1, CBD
office in non-major markets and suburban office in major and non-major markets have not performed as
well.
1
The Moody’s CPPI numbers are in nominal - not real dollars. The source for the presented Moody’s CPPI data is Tad Philipp, Kevin Fagan, and Keith
Leung, “Moody’s/RCA CPPI: Industrial Leads Price Gains Over the Last Three and 12 Months”, March 6, 2015. Data is as of January 2015.
Moody’s defines major markets as Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, DC. These markets have attracted the
most office investment over the 24 month period ending November 2014 see Tables 2 and 3.
3
Los Angeles has an education attainment rate of 31% compared to 32% for the national metro average. Similarly its high-tech LQ is below 1.0.
Nevertheless, due in part to its international prominence, large population, restrictive building codes, and unique demand generators, it is a magnet for
foreign and domestic investment and has experienced significant value appreciation beyond the past peak.
4
A location quotient (LQ) is an analytical statistic that measures a region’s industrial specialization relative to a larger geographic unit (usually the
nation). A LQ is computed as a) an industry’s share some economic statistic (earnings, GDP by metropolitan area, employment, etc.) at a local level,
divided by b) the industry’s share of the same statistic at the national level. For example, a LQ of 1.0 in mining at a regional level means that the
region and the nation are equally specialized in mining; while a LQ of 1.8 means that the region has a higher concentration in mining than the nation.
Source for this definition is the U.S. Department of Commerce
Bureau of Economic Analysis, http://www.bea.gov/faq/index.cfm?faq_id=478
2
1
Table 1
Source: The Moody’s/RCA Commercial Property Price Index (CPPI). The index is a measure of commercial real estate value change.
change
It is based on tracking sale price changes of individual properties that have resold.
National office real estate fundamentals h
have not fully recovered5. The year-end
end 2014 national office
vacancy rate remains at 13.9%. Although improved, it has not reached its prerecession low of 12.5% and
certainly not its 25 year low of 8.4% achieved in 2000. Year
Year-end
end 2014 national inflation adjusted
adju
average
office rent (real rent) is $29.66/SF which is below the $34.23/SF preceding peak level achieved in 2008
and well below the $39.66/SF level of 2000. With the exception of San Francisco and Boston6, individual
major office market fundamentals ha
have not recovered.
INVESTMENT RETURN
Federal Reserve policy is the big factor hovering over investment activity including commercial real
estate. The Federal Reserve’s bond buying policy has pushed short-term interest rates to near zero,
zero and
has kept them there
here for several years
years.. As a result investors put money into a wide range of asset classes
including stocks, high yield bonds, and commercial real estate.
Since so much money chased limited assets, prices were bid up. Equity markets soared to unprecedented
levels as less risky asset classes provided extremely low rates of return. In addition, high yield corporate
debt spreads approached 10-year
year low points
points. This is the same dynamic that helped drive commercial real
estate capitalization rates to prerecession lows and lifted commercial real estate values across the
spectrum.
Office cap rates were 6.80% in 2014 just 25 bps higher than the lowest level exhibited in 2007 at 6.55%.
Office cap rates spread to Treasuries
reasuries were 426 bps compared to 192 bps in 2007. Despite office cap rates
being near the low levels demonstrated in 2007, spreads to Treasuries
reasuries are approximately 234 bps
higher7. This suggests that the low cap rates are less a function of the relative value of commercial real
estate to Treasuries
reasuries but rather a function of low overall interest rates and favorable growth expectations.
expectations
Cap rate spread to Treasuries
reasuries are at a relative high point and certainly have no
nott recovered back to its low
point in 2007. Should interest rates rise while spreads, rent and occupancy rates remain unchanged,
unchanged
value may decrease. The key is to identify markets with growth potential that may realize value growth in
the face of cap rate expansion.
xpansion. It is important to recognize which markets will benefit from secular
changes that may be obscured by cyclical trends.
Major Markets
The major markets of Boston, Chicago, Los Angeles, New York, San Francisco, and Washington, DC are
driving high office building values. Aside from the availability of low cost capital, major market CBD office
benefitted from foreign investment. US Gateway cities have attracted investors pursuing stable
investments and in addition in the case of foreign capital the q
quest for safety8. Additionally, Houston had
5
6
7
8
The source of the data that
at appears in this paragraph is CBRE and is as of year
year-end 2014.
San Francisco has recovered both in terms of real rent and vacancy, however, Boston has recovered only in terms of vacancy.
Source for all the noted caprates, spreads, etc. is Real Capita
Capital Analytics.
As an example see Henny Sender, “China’s anti-corruption
corruption push may drive wealthy overseas” , The Financial Times, November 11, 2014.
2
recently been a magnet for investment; however, high energy prices fueled demand, which might quickly
evaporate if the recent rout in energy prices persists. Table 2 details the top metro areas for foreign and
domestic investment in all property types while Table 3 details the same for office buildings..
buildings
Table 2
Table 3
Market values in major markets have soared despite lagging market fundamentals9. With the exception of
San Francisco, real office rents in major markets are between 11.1% and 22.0%
% below their previous
peak10. Overall, record office building values notwithstanding, underlying real estate fundamentals have
not recovered back to peak levels experienced before the last recession. In order to invest
nvest prudently it is
important to identify long-term
term secular trends that underlay the broader real estate cycle being
experienced.
FACTORS FOR EVALUATI
EVALUATING LONG-TERM
TERM TRENDS IN METRO AREAS
College educated people tend to self
self-sort in to metro areas in which there are opportunities. In turn
companies locate in places they can hire educated employees11. This circle of opportunity becomes selfself
perpetuating as jobs are created in these metros. Accordingly, metros with high education attainment
rates are favored. We also examine and prioritize markets in which young college educated persons12
(YCE) live and are relocating to. Similarly markets with a high degree of STEM graduates attract
employment growth. Technology jobs have a disproportionate impact on local econ
economies.
omies. Markets with
tech job growth and high location quotients in tech using office jobs are identified
identified.
The primary manifestation of office demand is office
office-using jobs (OUJ). Markets
arkets in which office-using jobs
have grown over the past five years and are projected to grow over the next five years are highlighted.
9
An example is Washington, DC. “The amount paid for premium properties rose despite the city's high vacanc
vacancy
y rate and stagnant rents” See Max
Taves, “Commercial-Property
Property Prices in D.C. Go Their Own Way: Up”, Wall Street Journal, November 4, 2014.
10
CBRE
11
See Enrico Moretti, “The New Geography of Jobs”, Mariner Books, Houghton Mifflin Harcourt, Boston, New Yor
York, 2013
12
For the purposes of this report young college educated persons are those between the age
ages of 25 and 34 as used by City Observatory
http://cityobservatory.org/.
3
Young workers are attracted to metro areas with job opportunities and affordable housing. Metro areas
with affordable housing include some of the highest population growth markets in the nation. Markets
with high growth in the number of children between the ages of 5 and 14 will be noted. In addition to
these children representing future demographic growth, the parents of this age group have usually set
down roots at this point13, establishing a demographic base. Considered individually, the factors may not
establish future demand growth. However, the confluence of several of these attributes point to longterm economic expansion.
Once the markets are identified using the aforementioned criteria, metros that benefit from those factors,
but are major markets are not included. Markets with demand generators that include technology and
energy are performing better than others. It remains to be seen what effect plummeting oil prices will
have on energy dependent sectors. Accordingly, we are not including any energy centric markets on our
list14. Since there are few barriers to entry in most American metro areas on the supply side, we focus on
long term sustainable demand.
EDUCATIONAL ATTAINMENT
Metro areas with high education attainment levels have experienced much more economic growth than
those with significantly below average education rates. This trend will likely continue and reinforce itself
as college graduates self-sort to places with other college graduates. This takes the form of a persistent
cycle in which “knowledge breeds knowledge”15. As the overall American population grew more educated
between 1970 and 2010, metro areas became less alike in their rates of college degree attainment16.. “A
10% increase in the percentage of an area’s adult population with a degree in 1980 predicts six percent
more income growth between 1980 and 2000”17. “Differences in adults’ rate of bachelor’s degree
attainment are associated with nearly three-quarters of the variation in per capita income among metro
areas in 2010”18. “Metro areas where more than 33% of adults were college-educated had an average
unemployment rate of 7.5 percent in early 2012, compared with 10.5 percent for cities where less than
17% of adults had a college degree”, according to Edward Glaeser19. Aside from serving as a proxy for
the overall economic health of a metro area, education attainment rates point to more office-using jobs.
Some of the nation’s highest educational attainment levels are in the major market metro areas. The
highest is Washington, DC with 46.8% of residents having achieved a Bachelors Degree or higher. The
top 10 are rounded out by San Jose 45.3%, Stamford, CT 44%, San Francisco 43.4%, Madison, WI
43.3%, Boston 43.0%, Raleigh 41%, Austin 39.4%, Denver 38.2% and Minneapolis 37.9%20. The
national metro average is 32%.
13
Joel Kotkin, “Baby Boomtowns: The U.S. Cities Attracting The Most Families”, Forbes, September 12 2014.
This does not imply that good investments can not be made in energy centric markets with the right entry and exit points.
Alan Berube as quoted by Sabrina Tavernise, “A Gap in College Graduates Leaves Some Cities Behind”, New York Times, May 30, 2012. Alan Berube
is a senior fellow and deputy director of the Brookings Metropolitan Policy Program. A former policy advisor to the U.S. Treasury Department, he is an
expert on metropolitan demographics, low-wage workers, and urban poverty.
16
Alan Berube, “Where the Grads Are: Degree Attainment in Metro Areas”, Brookings.edu, May 31, 2012. Also from the same source “In the 20 most
highly educated metro areas in 1970, 16 percent of adults held a college degree. In those same metro areas in 2010, 38 percent of adults held a
college degree, a 22 percentage-point increase. The 20 least educated metro areas in 1970 made substantial progress too—growing their college
degree share from 9 percent to 25 percent—but that 16 percentage-point increase still left them farther behind the “smartest” metro areas by 2010.”
17
Edward Glaeser, Triumph of the City, Penguin Press, New York, 2013.
18
Alan Berube, “Where the Grads Are: Degree Attainment in Metro Areas of the City”, Brookings.edu, May 31, 2012.
19
Edward Glaeser is an economist at Harvard and the author of “Triumph of the City”. As quoted by Sabrina Tavernise, “A Gap in College Graduates
Leaves Some Cities Behind”, New York Times, May 30, 2012.
20
http://www.nytimes.com/interactive/2012/05/31/us/education-in-metro-areas.html. Based on the Brookings Institute’s analysis of US Census
American Community Survey data.
14
15
4
Table 4
Higher Education Attainment Rates by Metro Area (1970
(1970-2010)
Source: Brookings Metropolitan Policy Program
Demographic Trends
A young growing population is important, as overall long
long-term demographic trends are cause for concern
for office space demand.. Once baby boomers leave the workforce in growing numbers between 2015 and
2030, there
here will be fewer workers to fill office buildings. Metros with a growing college educated
millennial21 population will have a higher demand for office space.
Table 5
Annual Change in U.S. population (Millions)
Source: Moody’s Analytics, U.S. Census, CoStar Portfolio Strategy, Data as of Q3 2014
The following chart details forecast growth in working age population between 2014 and 2020.
21
For the purposes of this report Millennials are considered those born between 1980 and 2000. They are currently aged 15 to 35 and will be aged 30
to 50 in 2030.
5
Table 6
Cumulative Forecast Growth in Working Age Population (2014
(2014-2020)
Source: Moody’s Analytics; CoStar Portfolio
olio Strategy
Strategy, Data as of Q3 2014
Population growth alone is not sufficient to fill office buildings. The focus needs to be on college educated
population growth. College
ollege educated millennials will occupy office buildings well in to 2030 and will not
begin retiring until 2045 and beyond. Employers favor locating and expanding operations in metro areas
that have a young, highly educated, and growing workforce. Accordingly
Accordingly, we consider which metro areas
have an increasing level of educated
ted young people.
Once a trend is established it creates a virtuous cycle as more young college educated workers locate to
a metro - companies relocate/expand within the metro – attracting more young college educated
workers. Therefore let us consider the metro areas where the number of college educated people
between the ages of 25 and 34 are growing either because of internal market growth or migration.
Millennials are the most educated generation in US history22. As Table 7 illustrates23, the share of
Americans
ericans with a college degree has increased over the past half century.
Table 7
22
23
Victoria Stilwell, “Millennials Most-Educated
Educated U.S. Age Group After Dow
Downturn”, Bloomberg, Oct 8, 2014.
This chart is for 25-29
29 year olds nationally and differs from the statistics presented below for the 51 largest markets.
6
The number of YCEs has increased 25.2% from 2000 to 2012 in the 51 largest metro areas24. The share
of the YCE population with a 4yr degree in 2012 was 37.5% in the 51 largest metro areas.
areas Markets that
exceed the top metro average growth of 25.2% between 2000 and 2012 portend future economic growth
and demand for office space relative to other markets. Including only metros that experienced growth of
30% or more
re and in which the existing share of YCEs is 30% or more highlights the 17 metro areas
presented in Table 825.
Table 8
College Graduates aged 25 to 34
Source: Joe Cortright, City Observatory
This list generally follows a pattern of self sorting in which college educated Americans migrate to metros
with economic growth opportunities26. This is causing certain metros to diverge significantly from others.
Oklahoma City and Houston benefit
benefited from a growing energy sector. Greater Salt Lake City benefits from
internal population growth, in-migration
migration, and a healthy high-tech sector27. Nashville has benefitted from a
growing healthcare sector, successful entertainment industry, relatively low cost housing, and no state
income tax. Charlotte is a banking center and together with Nashville has developed into a southern
alternative to Atlanta with less congestion and more growth. Denver, Austin,, and Portland have
performed well and have developed urban life that draws young people. San Diego is a long time favorite
destination and Indianapolis has done better than average in drawing YCEs to its low cost environment.
environment
This list includes several surprises including Buffalo which appeals to a certain segment of YCEs seeking a
very low cost alternative to New York City and Boston.
In contrast, Detroit experienced a 10.5% decline in the number of YCEs and Cleveland and Providence
significantly below average increases of 0.89% and 6.38% respectively28. San Francisco
rancisco and San Jose
experienced low increases, however, these markets already have very high shares (at
at 50%)
50% of the age
group with four year degrees. The high cost of living in these areas may limit future growth in this
category. The Raleigh-Carey
Carey Metro area experienced slightly above average growth, but is starting
star
from a
very high base of 45.8%. Growth is happening in places with affordable housing, growing economies,
growing YCE population, and growing office
office-using
using jobs. All these factors are feeding off each other in a
beneficial loop.
Aside from the major and energy sector dependent markets, the list favors Salt Lake City, Nashville,
Denver, Austin, Orlando, San Diego, Tampa, Portland and to a lesser extent Sacramento, Baltimore,
Buffalo, Indianapolis and Charlotte.
24
All the data concerning YCEs is from Joe Cortright
Cortright,, “The Young and Restless and the Nation’s Cities”, CityReport, October 2014.
The reason for this screening mechanism is to highlight metro areas that have increases over a substantial base.
See Enrico Moretti, “The New Geography of Jobs”, Mariner Bo
Books, Houghton Mifflin Harcourt, Boston, New York, 2013.
27
Flavia Krause-Jackson,
Jackson, “The App of Mormon? Utah Draws Tech Like Silicon Valley: Cities”, Bloomberg, February 3, 2015 and Vauhini Vara, “How
Utah Became the Next Silicon Valley”, The New Yorker, February 3, 2015.
28
Not shown in Table 8. See Joe Cortright, “The Young and Restless and the Nation’s Cities”, CityReport, October 2014
25
26
7
STEM EDUCATION AND HII TECH EMPLOYMENT GR
GROWTH
High-Tech
Tech employment growth is directly correlated with the share of residents with a Bachelor’s Degree
in science, computer science (Technology), engineering, or math (STEM)29. Markets with a considerable
amount of residents with STEM degrees combined with a high growth rate of high-tech
high
employment
should portend solid future growth. The chart below presents markets with a strong pool of residents
with a Bachelor's Degree in STEM30.
Table 9
Source: U.S. Census; CoStar Portfolio Strategy
The above data concerning high-tech
tech employment growth and STEM education mostly favors the metros
detailed in the upper half of the charts. San Francisco, Nashville, and Salt Lake City exhibited the
strongest growth. With the exception of the major markets, the list favors Nashville, Raleigh, Austin,
Seattle, San Diego, Denver, Salt Lake City, Minneapolis,, Portland, Indianapolis, and Columbus.
Columbus
MARKETS WITH TECH JJOB GROWTH
Technology is not the largest sector of the labor force, but it represents one of the major growth engines
of overall employment. Technology jobs constitute 5% of office
office-using
using demand in CBDs and 8% in
suburban markets31; however, they drive demand for other sectors as well. Innovation
nnovation technology
reflects on the overall vibrancy of the market. Consider that for 2014, net office space absorption as a
percentage of total inventory excelled in tech heavy markets32. The net absorption advantage of tech
heavy markets was even more substantial for the prior two year period and the prior five year period.
29
Source: U.S. Census; CoStar Portfolio Strategy.
Source: U.S. Census; CoStar Portfolio Strategy. Reside
Residents 25+ as of 2010.
CoStar Portfolio Strategy.
32
Top tech markets include San Jose, Seattle, San Francisco, Austin, and Raleigh. These are leaders in tech employment as a percent
per
of total
employment. More diversified markets with higher tech location qu
quotients
otients such as Washington, DC are not included in this set.
30
31
8
Table 10A
Table 10B
12 Month Net Absorption as % of Total
Market Inventory
2-Year Net Absorption as % of Total
Market Inventory
-San Jose
-Seattle
-San Francisco
-Austin
-Raleigh
Source: CoStar Portfolio Strategy
-San Jose
-Seattle
-San Francisco
-Austin
-Raleigh
Source: CoStar Portfolio Strategy
Table 10C
5-Year Net Absorption as % of Total
Market Inventory
-San Jose
-Seattle
-San Francisco
-Austin
-Raleigh
Source: CoStar Portfolio Strategy
Enrico
ico Moretti’s research indicates that for each new high
high-tech
tech job in a metropolitan area, five additional
local jobs are created33.
The areas with strong growth rates, mostly, have strong concentrations of high
high-tech
tech office jobs. HighHigh
tech office jobs are getting more concentrated as opposed to finance jobs that are dispersing34.
33
Based on his analysis of 11 million American workers in 320 metropolitan areas. See Enrico Moretti, “The New Geography of Jobs”,
Jo
Mariner Books,
Houghton Mifflin Harcourt, Boston, New York, 2013
013
34
e-mail
mail correspondence with Jon Southard of CBRE also see See Enrico Moretti, “The New Geography of Jobs”, Mariner Books, Houghton
Hought Mifflin
Harcourt, Boston, New York, 2013
9
Table 11
Source: CBRE
The markets with the highest tech location quotients are as expected
area/Silicon Valley. Other high-tech
tech hubs include Seattle: 2.38, Boston: 1.97,
and San Diego: 1.62. Other markets with better than average location
economic capitals Atlanta:
tlanta: 1.54, Dallas: 1.53, and Chicago: 1.09. Five of
markets score well.
in the San Francisco Bay
Raleigh: 1.97, Denver: 1.90
quotients include regional
the top six US investment
OFFICE-USING JOBS
Office demand is driven by jobs that require office space. Office
Office-using
using jobs (OUJ) for the top 54 markets
tracked by CoStar increased 2.7% per year over the past five years and are forecast to grow 2.1% over
the next five years.
The following charts detail growth in office
office-using
using jobs between 2009 and 2014 (past five years) and
projected growth from 2014-2019
2019 (next five years) for MSAs with population above one million.
Table 12
Cities with Office Job Growth - Past Five Years
Source: CoStar Portfolio Strategy
10
The markets that led growth patterns over the past five years where Raleigh-Cary
Cary NC: 6.6%, AustinAustin
Round Rock-San
San Marcos TX: 6.2%, Nashville
Nashville-Davidson-Murfreesboro-Franklin
Franklin TN: 6.2%, San JoseJose
Sunnyvale-Santa
Santa Clara CA: 5.6%, San Francisco
Francisco-San Mateo-Redwood
Redwood City CA: 5.4%, Jacksonville FL:
4.3%, Dallas-Fort Worth-Arlington
n TX:4.1%, Houston
Houston-Sugar Land-Baytown
Baytown TX: 4.0%, Salt Lake City
UT:3.9% and Miami-Miami Beach-Kendall
Kendall FL:3.9%.
Table 13
Cities with Office Job Growth - Next Five Years
Source: CoStar Portfolio Strategy
The markets projected to lead office
office-using jobs over the next five years are Phoenix-Mesa
Mesa-Glendale AZ:
3.5%, Austin-Round Rock-San
San Marcos TX:3.5%, West Palm Beach
Beach-Boca Raton-Boynton
Boynton Beach FL: 3.3%,
Raleigh-Cary NC:3.1%, Dallas-Fort
Fort Worth
Worth-Arlington TX: 3.1%, Miami-Miami Beach-Kendall
Kendall FL: 3.1%,
Atlanta-Sandy Springs-Marietta
Marietta GA:3.1%, Charlotte
Charlotte-Gastonia-Rock Hill NC-SC:3.0%,
SC:3.0%, and NashvilleNashville
Davidson-Murfreesboro-Franklin
Franklin TN: 3.0%.
Projected OUJ growth is not by itself an indicator of the long term vibrancy of an office market.
market For
example, high projected job growth may be indicative of a market rebounding from significant great
recession and housing bust job losses. These markets may also be fundamentally volatile. Other growth
markets may be concentrated in a volatile industry such as energy.. Growth markets with very low
educational attainment rates may not inspire confidence in long term stability. If we separate out the
energy markets35, markets rebounding from significant job losses36, markets with low education
attainment rates37, and major markets38, the list favors Austin-Round Rock-San
San Marcos TX, Greater
Miami-Southeast Florida39, Raleigh
Raleigh-Cary NC, Dallas-Fort Worth-Arlington TX, Atlanta-Sandy
Atlanta
SpringsMarietta GA, Charlotte-Gastonia-Rock
Rock Hill NC
NC-SC, Nashville-Davidson-Murfreesboro-Franklin
Franklin TN, Salt Lake
City UT, and Indianapolis-Carmel
Carmel IN.
35
i.e. Houston-Sugar Land-Baytown
Baytown TX, Oklahoma City OK.
i.e. Phoenix-Mesa-Glendale AZ, Las Vegas-Paradise
Paradise NV. These markets lost many jobs during the downturn and the outsized projected gains reflect
a bounce back from a low point, not necessarily long term sustained growth.
37
i.e. Phoenix-Mesa-Glendale AZ, Las Vegas-Paradise
Paradise N
NV, Birmingham-Hoover AL, San Antonio-New Braunfels TX, St. Louis MO-IL
MO
38
i.e. San Jose-Sunnyvale-Santa
Santa Clara CA, San Francisco
Francisco-San Mateo-Redwood City CA, Los Angeles-Long Beach-Glendale
Glendale CA.
39
i.e. Miami-Miami Beach-Kendall
Kendall FL, Fort Lauderdale
Lauderdale-Pompano Beach-Deerfield Beach FL, West Palm Beach-Boca Raton-Boynton
Boynton Beach FL. Although
these markets include some of the negative characteristics noted above, the metropolitan area appears poised for long term secular growth. Please
see the addendum for more detail.
36
11
HOUSING AFFORDABILIT
AFFORDABILITY AND YOUNG FAMILIES
Housing affordability is important for employers since wages can be lower and young families can
purchase homes for less. According to Jed Kolko,, chief economist at the online real estate firm Trulia
“Cities with the strongest job markets would grow even faster if more people could afford to live there.
The additional population would help spur further job growth, which, in turn, would strengthen the local
economy and foster more middle-class
class jobs”40. Housing affordability is a significant draw for YCEs as well
as young families with children aged 5
5-14.. This age range is important because it encompasses when
parents often move due to the cost of hou
housing, schools and long-term
term economic security41.
Table 14 lists 52 markets with populations greater than one million in their order of housing
affordability42. Being ranked in the top part of the chart does not necessarily indicate future growth or
viability if it is not accompanied by growing economic opportunity. Conversely, certain metro areas
experiencing economic growth within the third or even the fourth quadrant of this list offer are attractive
alternatives to the most expensive
sive markets.
Table 14
Source: Wendell Cox (Demographia) and Hugh Pavletich (Performance Urban Planning), “11th Annual Demographia International Housing Affordability
Aff
Survey” (2015 Edition: Data from Third Quarter 2014)
40
Josh Boak, “Why areas with good jobs have hard
hard-to-afford
afford homes” Associated Press as presented in the Wall Street Journal, December 9, 2014.
Joel Kotkin “Baby Boomtowns: The U.S. Cities Attracting The Most Families”, Forbes, September 12, 2014.
Source: Wendell Cox (Demographia) and Hugh Pavletich (Performance Urban Planning), “11th Annual Demographia International Housing
Hou
Affordability Survey” (2015 Edition: Data from Third Quarter 2014).
41
42
12
Domestic migration is increasingly driven by the quest for affordable housing. The country’s fastestgrowing cities are now those where housing is more affordable than average43.
We also present metros that in fact have a growing population of young families as evidenced by the
number of children between five and fourteen. The top 12 markets attracting young families with children
have housing affordability indexes of 4.0 or less.
Table 15
Rise In No. Of
Children Aged 5-14,
Metro Area
2000-13
Raleigh, NC
55.7%
Austin, Tx
49.3%
Las Vegas, NV
39.0%
Charlotte, NC
32.9%
Phoenix, AZ
29.3%
Dallas-Fort Worth, TX
28.2%
Atlanta, GA
26.1%
Houston, TX
25.8%
Nashville, TN
22.7%
Orlando, FL
22.6%
San Antonio, TX
21.5%
Salt Lake City, UT
20.7%
Denver, CO
18.0%
Oklahoma City, OK
17.9%
Indianapolis, IN
13.4%
Riverside-San Bernardino, CA
11.2%
Washington, DC-VA-MD-WV
10.0%
Columbus, OH
10.0%
Tampa-St. Petersburg, FL
9.6%
Portland, OR-WA
7.3%
Median Multiple
3.4
3.9
3.9
3.9
3.8
3.3
2.9
3.5
3.6
3.8
3.5
4.0
4.9
3.0
2.9
5.1
4.2
3.0
3.1
4.8
Source: Joel Kotkin and Wendell Cox for rise in number of children and Wendell Cox and Hugh Pavletich, “11th Annual Demographia International
Housing Affordability Survey” (2015 Edition: Data from Third Quarter 2014) for housing affordability44
The above chart lists metros attracting families with young children. It includes markets with high growth
in YCE, OUJ, and with relative affordable housing such as Raleigh, Austin, Charlotte, Dallas, Houston, and
Nashville. The combination of affordable housing and economic growth attract young families, which in
turn fosters further growth.45
METRO CONSIDERATION
After considering the long-term factors detailed above, we set aside metros that have low education
attainment rates46 or are concentrated in the more volatile energy sector47. Nine of the fourteen
43
“This is a reversal from the early years of the millennium, when easy credit allowed cities to grow without regard to housing cost and when the
fastest-growing cities had housing that was less affordable than the national average. Among people who have moved long distances, the number of
those who cite housing as their primary motivation for doing so has more than doubled since 2007”. See Shaila Dewanaug, “Affordable Housing Draws
Middle Class to Inland Cities”, New York Times, August 3, 2014.
44
Joel Kotkin is R.C. Hobbs Professor of Urban Studies at Chapman University. He is the executive editor of www.newgeography.com. Wendell Cox is
principal of Demographia, a St. Louis public policy consultancy
45
Joel Kotkin, “Baby Boomtowns: The U.S. Cities Attracting The Most Families”, Forbes, September 12 2014. Based on the work of Wendell Cox.
46
For the purposes of this report a low educational attainment rate is defined as below 29%. Examples include Phoenix: 27.2%, Orlando: 28.1%, Las
Vegas: 21.6% compared to national metro average of 32%. Miami-Ft. Lauderdale (28.1%) was included despite having a low educational attainment
rate because of it being a global city with category changing potential.
47
As the price of oil soared in recent years, energy dependent markets were very successful. With the price of oil down significantly– markets are
exposed to the downside. Energy is an important demand driver. But over-dependency can render markets volatile. Markets that are diversified but
have an energy component are more protected. Dallas and Denver formerly more dependent on energy now have more diverse economic bases.
Dallas and Denver are also regional economic capitals and have business services, technology and healthcare demand drivers. Houston is more
diversified than it had been in the 1970s but still significantly energy dependent as are Oklahoma City and New Orleans. The following is a CoStar list
of selected metros and their energy location quotient (LQ): Houston: 5.92, Oklahoma City: 4.77, New Orleans: 2.32, Pittsburgh:1.46, Dallas - Fort
13
highlighted markets are state capitals48 which frequently have built in job engines in the form of state
government and the presence of one or more universities. Since there are few US markets with true
barriers to adding supply, the focus is on those areas with long term demand growth. Some of these
markets are changing in a fundamental way. Please see addenda for more detail on the markets.
CONCLUSION
The metros that seem poised for long-term growth based on the criteria detailed in this report are Austin,
Raleigh, Denver, Salt Lake City, Nashville, and Charlotte. These markets exhibit fundamental strength in
high and/or growing education attainment levels. They have experienced a relatively high rate of growth
in the number of college graduates aged 25 to 34, from 2000 to 2012. They have experienced growth
and/or forecast to experience growth in office-using jobs. Housing is relatively affordable and young
families have migrated to these metros. Most of the aforementioned metros have growing tech sectors.
These office markets stand out in several long term growth factor categories that create and sustain
office demand.
Other markets such as Seattle, San Diego, Atlanta, Dallas-Ft. Worth, Portland, Minneapolis, and
Indianapolis exhibit long term growth attributes in certain categories that suggest consideration after
factoring qualitative factors and overall market position. Seattle has the fourth highest technology
location quotient in the US, a very high education attainment level, and is considered more affordable
than rival California tech cities. San Diego has an above average education attainment level and has
experienced a high growth rate in the number of college graduates aged 25 to 34. Portland is well known
for being attractive to young people and has attracted YCEs and STEM jobs.
Although Atlanta and Dallas-Ft. Worth have had low growth in the number of college graduates aged 25
to 34, they are affordable housing markets that have attracted young families in great numbers. In
addition, they have experienced growth in office-using jobs over the past five years and are expected to
do the same over the next five years. Minneapolis and Indianapolis are the only Midwestern cities on our
list. Minneapolis is notable for its high educational attainment level and high-tech employment growth.
Indianapolis has had a high level of office-using job growth over the past five years and is forecast to
have above average growth over the next five years. It is an affordable housing market and has attracted
young families over the past decade.
In addition, Greater Miami, which lagged in many of the considerations, was included due to its strong
projected growth in office-using jobs and it being a global city with potential for category changing
growth.
Many of these metros are being transformed into fundamentally stronger cities and office markets.
Seattle and Miami may catapult to tier one status over the next 15 to 20 years. Although most of the
smaller markets may remain secondary destinations, they can nevertheless achieve long term growth and
be a source of solid office building investment returns.
Selecting the appropriate metro is important, but equally as vital is discerning which CBD or suburban
submarket are the most suitable. Similarly, strategically choosing the right office building within the
preferred submarket is essential.
The metro area considerations detailed above go beyond cyclical rhythms and do not focus on entry
points. We include markets that we consider to have sustainable growth over the long run. This is not a
Worth: 1.36, Denver: 1.32, San Antonio: 1.04, Salt Lake City: 0.75, Austin: 0.68, Phoenix: 0.33, Saint Louis:0.23, Richmond: 0.19, Los Angeles:
0.18.
48
St. Paul is the capital of Minnesota and part of the Minneapolis-St. Paul metro area.
14
total return play and is not reflective of short term profitability49. As is true with all markets, they are
subject to cyclicality, overbuilding and supply/demand imbalance.
ADDENDA
Austin
Austin is the state capital of Texas, home to the University of Texas at Austin, and host to the annual
South by Southwest SXSW music, film, and interactive festival. Private employers include Dell, IBM, AMD,
and Apple. The Austin metro area has a very well-educated population with 39.4%50 of metro area
residents possessing a college degree compared to the national metro average of 32%51. It has also
experienced the sixth highest (44.3%) percent increase in the number of college graduates aged 25 to
34, from 2000 to 2012. Austin’s share of the same age bracket with a 4yr degree is 40.8%. It boasts the
seventh highest share of residents with a degree in STEM and 24.8% growth in high-tech employment
from 2003-2014. The location quotient for high-tech jobs is 1.37 which seems low considering its tech
emphasis. However, it speaks to Austin’s versatility and diversification. In addition to its role as a
technology hub, Austin attracts biotech, pharmaceutical, government, and education jobs. Austin’s
housing affordability ratio is 3.9. Austin is the second highest metro in terms of growth in families with
children between the ages of 5 and 14. Children in the aforementioned age bracket constitute 13.9% of
the total population and grew by 49.3% between 2000 and 2013. Austin solid and growing educational
base has attracted YCEs in great numbers. It boasts the seventh highest share of residents with a degree
in STEM. Austin was second in the nation in growth of office-using jobs over the past five years and is
forecasted for the same over the next five years. Austin is a relatively affordable housing market and as a
corollary is one of the strongest metros in terms of young families.
Raleigh
Raleigh is the capital of North Carolina and home to North Carolina State University. It is considered part
of the Research Triangle, which includes Durham, home to Duke University and Chapel Hill, home of
University of North Carolina at Chapel Hill. The Raleigh metro area has a very well-educated population
with 41.0% of the metro area residents possessing a college degree compared to 32% for the national
metro average. Raleigh’s share of college graduates aged 25 to 34 is high at 45.8% and increased by
26.7% percent from 2000 to 2012. It boasts the sixth highest share of residents with a degree in STEM
at 12.0% and 36.9% growth in hi- tech employment from 2003-2014. Raleigh’s high-tech location
quotient is 1.97. Raleigh had the highest growth in OUJ at 6.6% over the past five years and is forecast
to grow 3.1% over the next five years. A housing affordability ratio of 3.4 puts it in the more affordable
category. Raleigh is the highest metro in terms of growth in families with children between the ages of 5
and 14. Children in the aforementioned age bracket constitute 14.6% of the total population and grew by
55.7% between 2000 and 2013. Raleigh has experienced very strong growth over the past five years.
Raleigh has one of the strongest educational attainment bases in the nation and a growing number of
YCEs. It is an affordable high-tech city both in terms of office space as well as housing.
Denver
Denver is the capital of Colorado and home of the University of Colorado Denver, University of Denver,
and Metropolitan State College of Denver. Denver is also considered the economic regional capital of the
mountain states. The Denver metro area has a very well-educated population with 38.2% of metro area
residents possessing a college degree compared to the national metro average of 32%. It has
experienced the fifth highest (46.6%) percent increase in the number of college graduates aged 25 to 34,
49
Although there is no guarantee of future returns, we believe that good investment returns can theoretically be made in many markets with the right
investment, entry, and exit timing.
50
www.nytimes.com/interactive/2012/05/31/us/education-in-metro-areas.html.
51
http://www.brookings.edu/blogs/the-avenue/posts/2012/05/31-educational-attainment-berube. This is for the national metro average. The general
number is lower.
15
from 2000 to 2012. Denver’s share of the same age bracket with a 4yr degree is 38.9%. Denver residents
with a STEM degree constitute 10.5% of the population. Denver’s high-tech location quotient is 1.90 and
growth in high-tech employment from 2003-2014 was 8.7%. Denver had 2.5% average annual growth of
OUJ over the past five years and is projected to have 2.3% average annual growth over the next five
years. Denver’s housing affordability ratio is not favorable at 4.9, but compares well with more expensive
California cities such as Los Angeles, San Francisco, and San Diego. Denver is also the 13th highest
metro in terms of growth in families with children between the ages of 5 and 14 at 18.0% between 2000
and 2013. Denver’s high-tech location quotient is 1.90 and it is less concentrated in the energy sector
than it was in the past.
Salt Lake City
Salt Lake City is the capital of Utah and nearby Provo is the home of Brigham Young University. The Salt
Lake City MSA anchors the center of the Salt Lake City–Provo–Orem Combined Statistical Area (CSA)
which also includes the Provo-Orem MSA and the Ogden-Clearfield MSA. College degree achievement is
29.0%, 35.2% and 30.1% in the Salt Lake City, Provo-Orem, and Ogden-Clearfield MSAs respectively. It
has also experienced the second highest (50.1%) percent increase in the number of college graduates
aged 25 to 34, from 2000 to 2012. Salt Lake City’s share of the same age bracket with a 4yr degree is
31.6%. Although, only 8.7% of its population is in possession of a degree in STEM, growth in high-tech
employment from 2003-2014 was 38.5%. The Salt Lake City CSA benefits from a healthy high-tech
sector52. Salt Lake City also leads the nation in absolute upward mobility53.
Salt Lake City, Provo, and Ogden had 3.9%, 6.7%, and 3.5% average annual growth of OUJ over the
past five years and are projected to have 2.9%, 3.2%, and 2.6% average annual growth over the next
five years. Salt Lake City’s housing affordability ratio of 4.0 is not as attractive as other metros
highlighted in this study; however, demographic growth is considerable as it has a high local birthrate. It
was the twelfth highest metro in terms of growth in families with children between the ages of 5 and 14
at 20.7% between 2000 and 2013.
Nashville
Nashville is the capital of Tennessee, home of Vanderbilt University, the Country Music Hall of Fame,
Music Row, and a booming arts scene. Employers include Nissan, HCA, and Saint Thomas Health
Services. The Nashville metro area has a low average educated population with 29.7% of metro area
residents possessing a college degree compared to 32% for the national metro average. However, it has
experienced the fourth highest (47.6%) percent increase in the number of college graduates aged 25 to
34, from 2000 to 2012. Nashville’s share of the same age bracket with a 4 year degree is 38.8%
compared to 37.5% for the top metro average. It boasts the fifth highest share of residents with a
degree in Science, Technology, Engineering, and Math54 (STEM) and is second only to San Francisco in
growth in hi tech employment from 2003-2014 (49%). Nashville can claim the third greatest growth
(6.2% annual average) in office-using jobs over the past five years and is forecasted for the ninth highest
(3% annual average) over the next five years. A housing affordability ratio (household income to home
price) of 3.6 puts it in the more affordable half of US housing markets55. Nashville is also the ninth
highest metro area in terms of growth in families with children between the ages of 5 and 14. Children in
the aforementioned age bracket constitute 12.7% of the total population and grew by 22.7% between
2000 and 2013.
52
Flavia Krause-Jackson, “The App of Mormon? Utah Draws Tech Like Silicon Valley: Cities”, Bloomberg, February 3, 2015 and Vauhini Vara, “How
Utah Became the Next Silicon Valley”, The New Yorker, February 3, 2015.
Absolute Upward Mobility is a measure of the average economic outcome of a child from a below-median income family. See http://www.equalityof-opportunity.org/index.php/city-rankings/city-rankings-100.
54
Defined as a BA degree in Science(S), Computer Science(T), Engineering(E), or Math(M).
55
Top 52 markets with population in excess of one million.
53
16
Charlotte
Charlotte is the largest city in North Carolina and home to Bank of America’s and Wells Fargo’s east coast
operations headquarters, Duke Energy, and Nucor Corporation. It also hosts the University of North
Carolina at Charlotte and the NASCAR Hall of Fame. The Charlotte metro area has an average educated
population with 32.2% of the metro area residents possessing a college degree compared to 32% for the
national metro average. Charlotte’s share of college graduates aged 25 to 34 is high at 38.7% and
increased by 30.44% percent from 2000 to 2012. Residents with a degree in STEM constitute 8.1% of
the population and the market experienced 21.3% growth in high-tech employment from 2003-2014.
Charlotte had above average growth in OUJ at 3.6% over the past five years and is forecast for above
average growth of 3.0% over the next five years. Charlotte’s housing affordability ratio is 3.9. Charlotte
is the fourth highest metro in terms of growth in families with children between the ages of 5 and 14.
Children in the aforementioned age bracket constitute 14.2% of the total population and grew by 32.9%
between 2000 and 2013. Charlotte has grown into a national finance center as well as one of several
southeastern economic hubs.
Seattle
Seattle is home to Costco Wholesale, Microsoft, Amazon.com, PACCAR Inc., Starbucks Corporation and
Nordstrom as well as the University of Washington-Seattle. The Seattle metro area has a well-educated
population with 37.0% of the metro area residents possessing a college degree compared to 32% for the
national metro average. Seattle’s share of college graduates aged 25 to 34 is high at 39.4% and
increased by 26.52% percent from 2000 to 2012. It boasts the eighth highest share of residents with a
degree in STEM at 11.7% and 35.8% growth in high-tech employment growth from 2003-2014. Seattle’s
high-tech location quotient is 2.38. Seattle has become the center of the most intensive engineering in
cloud computing: the design and management of global-scale data centers56. Seattle had above average
growth in OUJ at 2.8% over the past five years and is forecast for average growth of 2.1% over the next
five years. A housing affordability ratio of 5.2 puts it squarely in the more expensive quadrant; however,
it is more affordable than rival California cities San Francisco-Oakland (9.2), San Jose (8.7), San Diego
(7.9) and Los Angeles (7.7). Seattle has experienced above average growth in the number of children
between the ages of 5 and 14 at 3.8% growth between 2000 and 2013. Seattle has an excellent and
growing educational attainment level with a solid hi tech location quotient57. Its employment base is large
and diversified. Although it has experienced a recent run up in market rent, it is still lower cost than its
San Francisco Bay area rivals. Seattle’s housing costs as well as its lack of a state income tax render its
cost of living significantly lower than California rival cities.
San Diego
San Diego is the home of the U.S. Navy’s Pacific Fleet and is a biotechnology hub. It also hosts University
of California at San Diego, San Diego State and the University of San Diego. The San Diego metro area
has an above average educated population with 33.7% of metro area residents possessing a college
degree compared to 32% for the national metro average. Recently, it has also experienced the eighth
fastest rates of growth in the number of college graduates aged 25 to 34, from 2000 to 2012 (42.6%).
Its share of the same age bracket with a 4yr degree is a respectable 36.0% compared to 37.5% for the
top metro average. Hi tech employment growth from 2003-2014 has been relatively mild at 13.4% since
it begins from a strong base. San Diego’s high-tech location quotient is 1.62 and 10.7% of San Diego
residents have a degree in STEM. San Diego’s tech sector also benefits from synergies with adjacent
Tijuana, Mexico58. San Diego had below average growth in OUJ at 2.0% and is forecast for below
average growth of OUJ at 1.6% over the next five years. San Diego has a housing affordability ratio of
8.3 which puts it squarely in the least affordable quadrant. San Diego has experienced a decline in the
56
57
58
Quentin Hardy, New York Times, “Seattle, the New Center of a Tech Boom”, June 11, 2014.
The fourth highest in the nation after 1- San Jose, 2- San Francisco, 3- Washington, DC.
James Nash, Bloomberg, “Drones Lift Off as San Diego and Tijuana Bond Over Tech”, February 27, 2015.
17
number of children between the ages of 5 and 14 of 4.7% between 2000 and 2013. San Diego has a
solid and growing educated population and has attracted YCEs in great numbers. San Diego’s high-tech
location quotient is 1.62.
Atlanta
Atlanta is the capital of Georgia and the economic heart of the Southeast. Major corporations headquartered in Atlanta include Coca Cola, BellSouth, Delta Airlines, Home Depot, UPS, and Georgia-Pacific.
It also hosts Georgia State University, Georgia Institute of Technology and Emory University. The Atlanta
metro area has a well-educated population with 34.1% of metro area residents possessing a college
degree compared to 32% for the national metro average. Recently, it has experienced one of the slowest
rates of growth in the number of college graduates aged 25 to 34, from 2000 to 2012 (2.81%). However,
its share of the same age bracket with a 4yr degree is a respectable 34.8% compared to 37.5% for the
top metro average. High-tech employment growth from 2003-2014 has been relatively mild at 14.1%.
Atlanta’s high-tech location quotient is 1.54 and 9.1% of its residents have a degree in STEM. Atlanta had
above average growth in OUJ at 3.5% and is forecast is for above average growth of 3.1% in OUJ over
the next five years. A housing affordability ratio of 2.9 puts it squarely in the most affordable quadrant.
Atlanta is also the seventh highest metro area in terms of growth in families with children between the
ages of 5 and 14. Children in the aforementioned age bracket constitute 14.6% of the total population
and grew by 26.1% between 2000 and 2013. It has been the ninth highest for office investment and
overall investment volume over the past 24 months. Atlanta is a regional economic capital with a solid
educational base. However, it has lagged in recent years in its ability to attract YCE. Although it has a
high-tech LQ of 1.54, High-tech employment growth has been slower than expected. Atlanta is expected
to experience above average growth in OUJ, but at a slower pace than experienced over the past five
years. Atlanta is one of the most affordable housing markets in the US and as a corollary it is one of the
fastest growing metro area in terms of young children. Although not poised for the torrid growth of some
of its rivals, Atlanta has good prospects.
Dallas-Ft. Worth
The Dallas-Ft. Worth metro area is the economic heart of the Southwest. Major corporations based in the
Dallas area include Exxon Mobile, AT&T, Fluor Corporation, Kimberly-Clark, Holly Frontier, J.C. Penney,
Texas Instruments, American Airlines, and Southwest Airlines. It also hosts the University of North
Texas, The University of Texas at Arlington, and The University of Texas at Dallas. The Dallas-Ft. Worth
metro area has an average educated population with 31.4% of metro area residents possessing a college
degree compared to the national metro average of 32%. Dallas has recently experienced a below
average rate of growth in the number of college graduates aged 25 to 34, from 2000 to 2012 (20.1%).
Its share of the same age bracket with a 4yr degree is 30.7%59 compared to 37.5 for the top metro
average. Just 8.8% of its residents have a degree in STEM. Hi tech employment from 2003-2014 has
been relatively mild at 4.9%60. Nevertheless, Dallas’s high-tech location quotient is 1.53. Dallas-Ft. Worth
had above average growth in OUJ at 4.1% over the past five years and is for above average growth of
OUJ at 3.1% over the next five years. A housing affordability ratio of 3.3 places it in the more affordable
half of large US markets. Dallas-Ft. Worth is also the sixth highest metro in terms of growth in families
with children between the ages of 5 and 14. Children in the aforementioned age bracket constitute
15.4% of the total population and grew by 28.2% between 2000 and 2013. It has been the eighth
highest for office investment and the sixth highest for overall investment volume. Dallas-Ft. Worth is
expected to continue being the jobs juggernaut it has been over the last five years. Affordable housing
and population growth and its position as the southwest’s economic capital should bolster its position into
the next decade.
59
60
Dallas-Ft. Worth metro area.
Dallas-Ft. Worth.
18
Portland
Portland is the largest city in Oregon and home of Portland State University. The Portland metro area has
an above average educated population with 33.0% of metro area residents possessing a college degree
compared to 32% for the national metro average. It has experienced a 37.3% percent increase in the
number of college graduates aged 25 to 34, from 2000 to 2012 compared to 25.2% for the top metro
average. Portland’s share of the same age bracket with a 4 year degree is 37.1% comparable to the top
metro average. The share of residents with a degree in Science, Technology, Engineering, and Math
(STEM) is 9.28% and growth in high-tech employment from 2003-2014 was 15.4%. Portland experienced
2.9% annual average growth in office-using jobs over the past five years and is forecasted for 1.9%
annual average growth over the next five years. A housing affordability ratio (household income to home
price) of 4.8 puts it in the less affordable half of US housing markets. Portland is the 20th highest metro
area in terms of growth in families with children between the ages of 5 and 14. Children in the
aforementioned age bracket constitute 7.3%.
Minneapolis
Minneapolis is part of a metro area that includes St. Paul, the Minnesota state capital. It is also home to
ten61 Fortune 200 companies as well as the University of Minnesota Twin Cities and the Mall of America.
In 2010, the metro economy had overtaken Detroit’s as the Midwest’s second-largest after Chicago62. The
Minneapolis-St. Paul metro area has a well-educated population with 37.9% of metro area residents
possessing a college degree compared to the national metro average of 32%. It has experienced below
average (21.3%) percent increase in the number of college graduates aged 25 to 34, from 2000 to 2012.
The twin cities metro area share of the same age bracket with a 4yr degree is 44.5% compared to 37.5%
for the top metro average. Minneapolis boasts the twelfth highest share of residents with a degree in
STEM at 10.4%, but only 9.5% growth in high-tech employment growth from 2003-2014. Minneapolis’s
high-tech location quotient is 1.10. Minneapolis had below average growth in OUJ at 2.0% over the past
five years and is forecast for below average of 1.4% over the next five years. A housing affordability
ratio of 3.2 puts it squarely in the top half of US housing affordability. Minneapolis-St. Paul growth in
families with children between the ages of 5 and 14 was 1.9% between 2000 and 2013. Minneapolis is an
affordable alternative to Chicago, but still provides more value than the industrial centric cities of
Cleveland and Milwaukee. Despite less than stellar growth in OUJ and YCE, it has a solid educational
base, including YCEs far above the top metro average. Minneapolis’ combination of affordable housing, a
solid corporate foundation, and high educational attainment level, render it a compelling low cost
alternative to Chicago and give it a solid competitive advantage to rust belt metros such as Cleveland,
Milwaukee, and Detroit.
Indianapolis
Indianapolis is the capital of Indiana and together with Bloomington63, situated 50 miles to the south, is a
center for Medical Devices and Equipment64, Drugs and Pharmaceuticals, and Agricultural Feedstock and
Chemicals. Major corporations headquartered in Indianapolis include WellPoint and Eli Lilly & Company.
The Indianapolis metro area has a low average educated population with 30.7% of metro area residents
possessing a college degree compared to the national metro average of 32%. Young college educated
persons have been migrating to Indianapolis. Recently, it has also experienced growth in the number of
college graduates aged 25 to 34, from 2000 to 2012 (30.5%). Its share of the same age bracket with a
4yr degree is a respectable 37.4% (average for the top metro average). Just 8.9% of its residents have a
degree in STEM. Hi tech employment from 2003-2014 has been relatively mild at 12.6%. Indianapolis
had above average growth in OUJ at 3.48% and is forecast for slightly less than average growth of 2.0%
over the next five years. A housing affordability ratio of 2.9 puts it squarely in the most affordable
quadrant. Indianapolis is also the 15th highest metro in terms of growth in families with children between
61
62
63
64
United Healthcare, Target, Best Buy, CHS, Inc. SuperValu, 3M Company, US Bancorp, General Mills, Medtronic, Land O’Lakes.
“Minneapolis needs population growth”, Star Tribune, September 7, 2013.
http://bloomingtonlifesciences.com/bloomington-1-in-medical-device-equipment-employment.
See Enrico Moretti, “The New Geography of Jobs”, Mariner Books, Houghton Mifflin Harcourt, Boston, New York, 2013.
19
the ages of 5 and 14 at 13.4% between 2000 and 2013. Indianapolis is a low cost alternative to Chicago,
Milwaukee, Cleveland, and Minneapolis and has the lowest vacancy rate of the peer group.
Miami
Miami is the major trading entrepôt65 between the United States and Central America, South America,
and the Caribbean. Joel Kotkin refers to the Miami area along with New York and Los Angeles as
American city-states. “Greater Miami often seems more the capital of Latin America than it does an
American region. Its population is heavily Hispanic, and trade, finance, construction and tourism tend to
focus southward”66. Miami’s economy functions somewhat independently of other parts of the US67.
Accordingly, demand drivers are different than for other parts of the United States. Southeast Florida
(Miami, Ft. Lauderdale, and West Palm Beach) in general and Miami in particular have attracted
significant foreign investment. Miami retail is the target of frequent European and Latin American
shopping tourism and Miami condominiums are repositories of flight capital. Miami also attracts those68
that are uncomfortable living in certain Caribbean and Central and South American countries69.
Tourism remains an important driver of the southeast Florida economy, but international trade is the
cornerstone of its potential to be a major world-class city. According to the GAWC measure of global
cities, Miami is considered an Alpha minus city and ranks 36th worldwide and sixth among American cities
70
. Southeast Florida was the seventh largest destination of foreign investment for “all property types”
and the tenth largest destination for capital from all sources for “all property types”71. Miami ranked
seventh worldwide and second in the United States after New York on the list of “cities that matter to the
world’s wealthy” according to the 2014 “Wealth Report” by consulting firm Knight Frank LLC72. Greater
Miami may be on its way to becoming a major American gateway for foreign investment.
Nevertheless, Miami lags in terms of educational attainment, high-tech jobs, and housing affordability.
The Miami-Ft. Lauderdale metro area underperforms with 28.1% of its residents in possession of a
college degree compared to 32% for the national metro average. The current share of 25 to 34 year olds
with a college degree as a percent of all 25 to 34 year olds is 29.6%, significantly below the top metro
average of 37.5%. However, growth in this demographic segment of 24.7% between 2000 and 2012 is
close to the top metro average of 25.2%. Southeast Florida cities have a low share of residents with a
degree in STEM; Miami - 6.6%, Fort Lauderdale - 6.7%, Palm Beach County 7.9%. High-tech
Employment growth in the 2003-2014 time period has been especially anemic. Fort Lauderdale
experienced a 1.9% increase and Miami a 10.3% decrease. Only Palm Beach County experienced an
above average result at a 17% increase.
Southeast Florida cities are expected to experience significant office-using job growth over the next five
years. Southeast Florida metro MSAs occupy the number 3 (West Palm Beach: 3.3%), 6 (Miami: 3.1%)
and 15 (Fort Lauderdale: 2.6%), spots in terms of five year projected growth. The past five year growth
in OUJ was also impressive at 3.9% for Miami, 3.3% for West Palm Beach and 2.8% for Fort Lauderdale.
Southeast Florida is attracting investment and is now within the top ten metros for investment in all
65
In this context the word is being used to signify Miami’s use as a conduit and trading post between the US and Latin America. This has certain
similarities to Hong Kong’s economic role with mainland China. The traditional term associated with a preindustrial duty free trade zone is not
intended.
66
Joel kotkin, Forbes, “A Map Of America's Future: Where Growth Will Be Over The Next Decade” September 23, 2013.
67
Joel Garreau out-lined that Miami effectively functions as the economic capital of the Southeast Florida, parts of central and South America and the
Caribbean. See Joel Garreau, “The Nine Nations of North America”, Houghton Mifflin Harcourt, 1981
68
The most notable influx is that of Cuban refugees in the 1960s, but over the years other political and economic driven migrants have relocated to
the area. These include immigrants from Haiti, Venezuela, Brazil, Argentina and other parts of Latin America.
69
As a recent example see Reed Johnson, Luciana Magalhaes, and Jeffrey Lewis “Rich Brazilians, Wary of Government, Look Abroad. President
Rousseff’s Re-Election Prompts More Wealthy Brazilians to Seek to Move or Set Up Businesses in South Florida, Obtain U.S. Residency”, Wall Street
Journal, February 5, 2015.
70
GaWC study - Jon Beaverstock, Richard Smith and Peter Taylor established the Globalization and World Cities Research Network (GaWC). A roster of
world cities was outlined in the GaWC Research Bulletin 5 and ranked cities based on their connectivity through four "advanced producer services":
accountancy, advertising, banking/finance, and law. The GaWC inventory identifies three levels of global cities and several sub-ranks. The 2008 roster,
similar to the 1998 version, is sorted into categories of "Alpha" world cities (with four sub-categories), "Beta" world cities (three sub-categories),
"Gamma" world cities (three sub-categories) and additional cities with "High sufficiency" or "Sufficiency" presence.
71
Real Capital Analytics
72
The Wealth Report 2014, Knight Frank LLC, London,http://www.thewealthreport.net/resources/thewealthreport2014.pdf,page 30
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property types. This investment is not limited to Miami as it has expanded to other parts of the metro
area including Ft. Lauderdale73. Within Miami itself, areas which were long considered undesirable are
being developed74.
Southeast Florida has a unique position within the United States. It has been an investment magnet and
has strong trade ties to Latin America and the Caribbean. Miami has the potential to become a major US
gateway city. Although it lags in terms of educational attainment, high-tech, and housing affordability, its
position as a regional economic hub between the United States, Latin America, and the Caribbean
renders it a special opportunity.
73
Robyn A. Friedman “Fort Lauderdale Finds Its Place in the Sun: Florida City, in Midst of a Comeback, Is Attracting Real-Estate Investors Willing to
Fork Over Hefty Sums”, Wall Street Journal, December 23, 2014.
74
Nadja Brandt “Miami Building Boom Spreads Into Downtown Tent City”, Bloomberg, October 27, 2014.
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